A turning point for globalisation

South Korea’s new president, Kim Dae Jung, elected in December, is faced with the prospect of the nation’s bankruptcy. Indonesia’s and Thailand’s debts have been relegated to junk bond status by the big credit rating agencies, and Japan’s banking system is also in danger. Meanwhile, the IMF’s new shock treatment threatens to cause violent social upheaval throughout East Asia. The result of globalisation, the elements of a worldwide maelstrom are piling up.

by Philip S Golub

For Southeast Asia the “golden age” of exponential growth, rising
real incomes, and social consensus is over. After years of
speculative euphoria and wildly inflating asset prices fuelled in
large part by external capital flows, the East Asian financial bubble
has burst with a vengeance, setting a deflationary process in motion
which could well upset the foundations upon which the region’s
political and social stability was tenuously built. More broadly,
Asia’s financial debacle of the past months, a monetary shock
structurally similar but of greater amplitude than the 1994-95
Mexican crisis, puts into question the development paradigm that has
driven emerging third world countries into a precarious
modernity.

Southeast Asian countries have become the victims of the very
process of economic internationalisation and integration to global
capital flows which accounted for their accelerated, albeit highly
uneven, development throughout the decade. While the first phase of
economic takeoff of Southeast Asia’s “dragons” (1) was triggered by
large inflows of Japanese direct investment, their growth pattern has
over the past decade been increasingly shaped and distorted since the
early 1990s by vast nomad financial inflows seeking high returns on
investment in emerging markets (2).

Volatile by nature, these flows - portfolio investment, bonds, and
bank loans with short maturities - sustained the very high rates of
domestic investment (productive and speculative), capital
accumulation, growth and indebtedness which fuelled the “East Asian
miracle”, but they also quite classically inflated endogenous bubbles
in the property and equity markets.

The phenomenon was particularly evident in Thailand, epicentre of
the crisis, where net external portfolio investment rose from $2.5
billion in 1994 to $4.1 billion in 1995, and short-term debt from
$29.2 billion to $41.4 billion, despite warning signs of a coming
deflation of the over-invested property sector and strains in the
over-exposed banking system. The deflation of the Thai property and
stock market bubble in 1996 (stock market values fell by 40%)
prefigured the far more brutal crisis which struck the this year.

It took the general decline of Southeast Asian export growth-rates
in late 1996, which revealed the structural vulnerability of
economies based on narrow competitive export niches (textiles,
electronics), and the appreciation of currencies pegged to a rising
dollar in 1997, to set the region’s dynamic in reverse. Currency
speculation began against the Thai baht in May 1997 and then spread
in waves to the rest of the region in the summer, leading to the
massive and uncontrollable repatriation of capital which followed.
The impact of the shock was in direct proportion to the dependence of
these economies on external flows. By contrast, far less
internationalised economies such as India or Vietnam have been
largely insulated from the crisis.

But the effects of Southeast Asia’s grand financial debacle have
yet to make themselves felt (3). Countries accustomed to
uninterrupted, if anarchic, development and to the social and ethnic
peace afforded by growing opportunity and falling poverty now find
themselves facing a substantial decline of growth rates, rising urban
unemployment and a big drop in living standards. The 25-40%
depreciation of local currencies has mechanically increased foreign
debt. At the end of October, Indonesia’s debt, already $110 billion
(50% of GNP), increased by 37%, that of Thailand (43% of GNP) by 35%
and that of Malaysia by 27%. As these are mostly private debts
contracted by local banks borrowing on the international inter-bank
market for onward lending, at enormous interest rate differentials,
to now insolvent domestic customers, the depreciations have caused a
wave of defaults in already shaky banking systems (4).

Nor are these depreciations likely to lead to an export-led
recovery. The region’s manufacturing sector will be penalised by
high-interest rates regimes (bond spreads have exploded since the
beginning of the crisis), designed to reassure foreign investors.
While the high import content of Asian exports, notably in the
electronic sector (where products are assembled from components
manufactured outside the exporting country) means that there will be
little competitive gain accruing from depreciation (5). These
mechanical deflationary effects will be compounded by the dampening
effects of the austerity cures and “stabilisation programmes”
demanded by the International Monetary Fund (IMF) in exchange for
financial aid packages designed to shore up the region’s financial
markets ($23 billion in Indonesia and $17 billion in Thailand). These
will further aggravate the deflationary effects of the financial
storm: Thailand’s growth (6.8% in 1996) will be non-existent in
1997-98 and Indonesia’s will be halved.

Japan, with its already faltering economy and brittle banking
system, will not be spared. The main source of bank lending to East
Asia and the region’s major trader (15% of Japanese exports went to
Southeast Asia alone), it too is likely to suffer from the economic
slowdown.

The interruption of capital flows and the coming budgetary
cutbacks will impact directly on infrastructure development, severely
restricting investment in public work programmes needed to sustain
Southeast Asia’s urban modernisation. Pre-crisis estimates of the
region’s minimum infrastructure requirements in water and sanitation,
transport, telecommunications and power until the year 2004 give a
fair idea of the scale this problem will pose. In 1995 baseline World
Bank estimates were that an average 6.5-7% of East Asian GDP
(compared to 5% in 1993) would have had to be invested annually in
infrastructure programmes just to alleviate major constraints and
meet urgent needs. Over the period 1995-2015, that would have
represented $192 billion for Indonesia, $50 billion for Malaysia,
$145 billion for Thailand and $48 billion for the Philippines. Such
levels of investment are inconceivable at the present time.

The crisis has upset the fragile social balance in urban areas
which are renowned for their massive environmental problems and their
lack of basic services such as housing, sanitation and clean water
(6). Urban areas have seen their populations swell as unqualified
industrial workers flooded into megalopoli which promised them better
lives. Uprooted from rural areas, this new urban proletariat has no
recourse to traditional but frayed countryside family-support systems
and is on the front lines of the coming social regression. Wages,
which had been rising throughout the region, are now falling, and
prices rises induced by currency devaluations are already cutting
into the incomes of the urban poor and the nascent middle classes (up
7% in Thailand since October 1996).

This reversal of fortunes carries a grave risk of social strain.
The pendulum swing from boom to recession, from falling poverty and
rising expectations to urban plight and widening social inequalities,
will prove far more painful and difficult to negotiate than is
generally admitted (7) for a region where social support systems are
non-existent and where, with the relative exceptions of Thailand and
the Philippines, there are no institutionalised channels for
democratic dissent. Dissent thus translates into sporadic eruptions
of violence.

"Values" on demand

Until now, social cohesion was founded on the effective ability of
regional leaders to deliver sustained material improvements and
reduce poverty. Despite great social inequalities, the dynamic of
wealth-creation generated a de facto consensus, muted political
dissent, and mitigated latent ethnic tensions (8). Unrepresentative
regimes were thus able to justify political authoritarianism on the
grounds that it “guaranteed stability necessary for development”. In
a paradoxical reverse image of Max Weber’s Protestant Ethic, “Asian
values” were called upon to account for East Asia’s emergence out of
rural backwardness and misery, as if economic development had been a
function of culturally-specific Asian virtues. The appeal to Asian
values was an instrument of legitimation which allowed political
leaders to smooth the inevitable strains born of rapidly evolving
economic and social circumstances.

But this did not stop the appearance of a civil society which
found spaces to air their demands in the interstices of politics. It
is the new middle class, for instance, which put Thailand on the path
of democratisation in 1993 and marginalised the armed forces’ role in
politics. Three thousand Thais died in the streets of Bangkok to make
that possible. In Indonesia too, the demand for a more democratic
society has made itself felt, through severely repressed trade union
activity and public demonstrations by the opposition to President
Suharto.

These have been exceptional or marginal occurrences, however. For
what political and social opposition forces there are generally lack
an institutionalised presence or substantive programmes for change.
At present they are hardly capable of challenging existing regimes.
Though the monetary crisis weakens the claim to legitimacy of
authoritarian regimes, it would be imprudent to conclude that
democratic prospects will improve.

Rather, it is within the ruling elites that political
reconstruction should first occur. In Indonesia, ASEAN’s largest and
potentially most unstable country, Mr Suharto’s succession is clouded
in uncertainty. The mandate of the ageing autocrat who has been in
power since 1966 normally expires in 1998; yet there are no clear
lines of succession. Despite a myriad of possible military and
civilian contenders for the post, the hypothesis of a more overt role
for the military in government in the post-Suharto period should now
be taken seriously. The United Malays’ National Organisation (UMNO)’s
one-party rule appears firmer in Malaysia, though the struggles at
the top between the prime minister, Muhammad Mahatir, and his
designated successor, the deputy prime minister, Anwar Ibrahim, could
put the well-oiled succession process in question. In Thailand, the
politicians show no signs of giving up their traditional
nepotism.

Swelling “anti-imperialist” rhetoric in the region and the
widespread denial of Asian responsibilities in the genesis of the
crisis testifies, nonetheless, to the deepening unease of some East
Asian leaders. The ever more strident anti-western critiques of Mr
Mahatir in Malaysia, and his and Indonesia’s President Suharto’s
belated discovery of the inequity of the financial markets are, like
“Asian values”, part of a discourse of political legitimisation,
designed to mobilise nationalist sentiment and preserve a consensus
which now is threatened. That discourse would be more credible had
these Southeast Asian leaders not so enthusiastically embraced what
they now denounce. Wasn’t Malaysia’s central bank a major player on
the currency markets in the late 1980s and early 1990s? Yet it is
easy to understand Mr Suharto’s dismay when he recently concluded
that “the sharp fluctuations of international financial flows and
currency trading have crushed the economic and social achievements of
developing countries” overnight (10).

The outflow of wealth from Southeast Asia is not a benign process.
Socially, it transfers part of the costs of financial globalisation
onto the peoples of the region, a process already experienced in
Latin America after the early 1980’s debt crisis which led to a
decade of net flows to creditors in Western capital markets. At the
geopolitical level, ASEAN had sought to win itself some autonomy from
the United States, China and Japan. Now that the region’s dependency
has so increased, even that timid attempt seems illusory.

(1) The relocation of Japanese capital to low-cost
labour zones was Japan’s response to the sustained rise of the yen in
the 1970s.

(2) Net private capital flows to emerging
countries was multiplied by six since 1990, from $50 billion to over
$300 billion in 1996. In 1995-96 East Asia became the world’s chief
recipient of foreign capital.

(3) Precise quantitative measurements of the
losses incurred by late October are still lacking, but by late
September $200-250 billion had been wiped off of book values in
Southeast Asia alone. Including Hong Kong would substantially
increase the figure. These losses are proportionally far greater than
the $500 billion loss sustained on Wall Street in 1987.

(4) Dozens of financial companies had already been
forced to close in Thailand, as well as 16 banks in
Indonesia.

(5) See Catherine Lebougre, “Asia Victim of its
own Success”, Conjoncture, Paribas, Paris, September
1997.

(6) Urban population growth averaged 4% per annum
in the first part of the 1990s in East Asia. World Bank projections
suggest that “more than one billion people will be added to urban
areas in the next generation”. In 1990, only 60% of the urban
population of East Asia, China included, had access to safe drinking
water, and only 77% to sanitation. See Infrastructure Development in
East Asia and Pacific: Towards a New Public-Private Partnership,
World Bank, Washington DC, 1995.

(7) See Steven Radelet and Jeffrey Sachs,"Asia’s
Bright Future, Europe’s Troubled One", Foreign Affairs,
November-December 1997. The authors argue complacently that Southeast
Asia’s currency crisis is “not the end of Asian growth but part of a
pattern of financial instability that often accompanies economic
growth”.